'Not enough'. This summed up what many critics felt about the climate agreement reached in Glasgow on 13 November 2021. For those for whom the energy transition is a matter of utmost urgency that should be at the top of everyone’s agenda, the result of these two weeks of negotiation was downright disappointing. No farewell to the world’s biggest polluter, coal, only a reduction in output. And even though the final agreement condemns fossil fuel subsidies, it still offers countries sufficient leeway to avoid responsibility and continue to financially support fossil energy. The disappointment is understandable.
However, we should not forget that some very important agreements have been reached at Glasgow, too. Leaders of more than a hundred countries, including Brazil, China, Russia and the US, have promised to end and reverse deforestation by 2030. Moreover, EU Commission chief Ursula von der Leyen and US President Joe Biden have announced a partnership to cut methane emissions by 2030. These are examples of the rough diamonds we can find beneath the coal if we dig deep enough.
But there are more potential gems among the results of COP 26. I’m referring in particular to the initiatives aimed at improving the measurability of sustainability performance, by developing uniform metrics and standards. As investors we need to understand the inherent sustainability risks and opportunities associated with each investment we make. We need to determine their contribution to sustainability objectives, like the UN Sustainable Development Goals (SDGs), so that we can allocate capital in the best possible way. Being able to measure this systematically and consistently will raise the bar in terms of data and disclosure and enable us to make better informed investment decisions.
‘Measurability’, ‘metrics’. These words don’t really have the allure of diamonds, do they? That may be true, but I’m convinced that they are essential for real, tangible progress in addressing climate change. If we want to go beyond statements, these are the tools that can give us the ability to apply a much more effective sustainability lens to distinguish between investments. As UN Secretary General António Guterres put it at the start of COP 26, when he was referring to emission reduction metrics and net-zero targets: there is 'a deficit of credibility and a surplus of confusion'. And he’s right. Without a shared language and verifiable metrics we’re simply not able to effectively evaluate and monitor sustainability performance.
International Sustainability Standards Board (ISSB)
APG has long been a strong advocate of high quality, transparent, reliable and comparable reporting by companies on climate and other environmental, social and governance (ESG) matters. We are, therefore, delighted with the establishment of the International Sustainability Standards Board (ISSB). The aim of this new body, announced during COP 26, is to deliver a comprehensive global baseline of sustainability-related disclosure standards. In the second half of 2022 the climate standard should be available. This will provide investors and other capital market participants with better, more standardized information on companies’ sustainability-related risks and help them make more well-informed decisions. We welcome the establishment of the ISSB because it resonates with APG’s own efforts (see text box) to cooperate with other global investors to build frameworks that have the potential to become the market standard. In 2020, the International Organization of Securities Commissions (IOSCO), said it was not happy with ‘either the fragmented way private sector standard setting for sustainability was developing or with the scale of the risk of greenwashing’. At COP 26 this same global standard setter for securities regulation was much more positive, when it told delegates that good progress is being made by the ISSB towards issuing the climate disclosure standard in 2022.
One area where more focus is long overdue is biodiversity (in that sense, the international pledge at COP 26 to end and reverse deforestation by 2030 could not have come at a better time). But things here are changing too; not least through the work of the Taskforce on Nature-related Financial Disclosures. This platform aims to develop and deliver a risk management and disclosure framework to report and act on nature-related risks and promote global consistency in nature-related reporting, building on the work of the Taskforce on Climate-related Financial Disclosures (TCFD).
These initiatives all promote consistent disclosure which is much needed and highly relevant to investors like APG! We are very pleased to see that robust and verifiable metrics to assess sustainability performance are becoming more codified and widely adopted. Likewise we as investors will have to be transparent on our road to net-zero emissions of greenhouse gases.
Cut, shape and polish
It takes between 1 and 4 billion years for a diamond to form and then months of work can be required to cut, shape and polish the rough stone. Similarly, it will undoubtedly take more time and work for sustainability reporting to reach the same level of standardization and ‘maturity’ as financial reporting. However, I am convinced that if everyone plays their part, we can make this diamond shine. The financial industry can play a key role if we continue to make sustainability and governance a core part of every aspect of investing.
Ronald Wuijster, member of APG Group's Executive Board, responsible for Asset Management